Stocks drop with commodities while U.S. Treasuries, dollar rise

U.S. stocks fell as concern about the federal budget debate overshadowed a rally in retailers after Home Depot Inc.’s earnings beat estimates. Treasuries gained while commodities retreated.

The Standard & Poor’s 500 Index closed down 0.4 percent at 1,374.54 as of 4 p.m. in New York after a 0.6 percent morning rally. Yields on 10-year U.S. notes lost two basis points to 1.59 percent, while the dollar strengthened against 13 of 16 major peers. The S&P GSCI Index of commodities dropped 0.2 percent as declines in coffee, gold and oil overshadowed a rally in natural gas to a one-year high.

A majority of Americans expect the U.S. to go over the fiscal cliff at the beginning of 2013 and would blame Republicans if it happens, according to a poll published today. Concern about the automatic spending cuts and tax increases, triggered if a budget deal isn’t reached, has weighed on the market since voters re-elected President Barack Obama and Republicans held control of the House in last week’s elections.

“The market waits to see what Congress and the administration will do on the fiscal cliff,” said Tom Mangan, who helps oversee about $3.6 billion as a money manager at James Investment Research Inc. in Xenia, Ohio. “The market will react to each soundbite coming out of Washington on light volume until something definite comes out,” he said. “In the absence of the macro issues, Home Depot would have led the market higher by a large amount.”

Yield Curve

Treasury 10-year note yields touched a two-month low earlier as trading resumed after the Veterans Day holiday. The difference between the yield on the two-year note and the 10- year security narrowed to the least in two months, signaling anticipation of slower economic growth.

The S&P 500 is down almost 4 percent since the Nov. 6 elections set up a showdown between Obama and the Republican- controlled House of Representatives over the budget. The president meets Democratic and Republican leaders in Congress this week. Lawmakers need to reach a deal in order to avert $607 billion in spending cuts and tax increases starting in January, an outcome that many economists predict would cause a recession.

Cliff Poll

A survey by the Pew Research Center and the Washington Post found 51 percent of those polled said they don’t think Obama and Congress will be able to agree on a package to replace the automatic measures agreed to in previous negotiations. Thirty-eight percent said they expected Obama and Congress to cut a deal.

The economy is already being damaged by concern about the budget, said Brian Moynihan, president and chief executive officer of Bank of America Corp.